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QACA Match

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#1 Kevin01


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Posted 18 November 2009 - 01:26 PM

We're inheriting a 401k/Profit Sharing Plan that implemented the QACA provision beginning 1/1/08 (calendar year Plan) as they were failing ADP in prior plan years and the Plan is also Top Heavy. The 401k Plan has been in place for over 10 Years. Their automatic enrollment feature enrolls participants at a rate of 3% of Comp for the 1st and 2nd Applicable Plan Year, 4% for the 3rd, 5% for the 4th, and caps at 6% for the 5th and any subsequent Plan Year.

The QACA match is the Basic Match that provides a match of 100% up to the first 1% and 50% of the next 5% contributed (max match of 3.5%). However, the Annual Notice states that "No matching contribution will be made on any deferral contributions that exceed 3% of Compensation in the first and second years, 4% in the third year, 5% in the fourth year, and 6% in the fifth and subsequent years." The match limit described here seems consistent with the match that would be associated with the automatic enrollment step-up feature as described in the paragraph above (i.e. the max match would be 2% of Pay for the first and second Plan year where a participant was enrolled at 3% of their Pay).

The question I have is if someone made an affirmative election to defer 6% of their Pay during their first year of participation, based on the match described above, would they be entitled to a 3.5% match or just a 2% Match? The research I've done seems to indicate it would be 3.5%. However, it's our client's understanding that the maximum exposure the Sponsor has for the match for the 2008 and 2009 Plan Year is 2% of Pay, and then this increases .50% for each additional year thereafter (for a cap of 3.5%). They base this on the sentence that I described in quotes in the paragraph above. I can't find anything that says their understanding is wrong, but based on what I've researched, this only applies to those that are automatically enrolled; everyone else that makes an affirmative election would be eligible for the entire match of up to 3.5%. Can someone please clarify this for me?


Edited by Kevin01, 19 November 2009 - 08:37 AM.

#2 Tom Poje

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Posted 19 November 2009 - 07:38 AM

hmmmm. what does the document say. The notice language you indicated would seem to fail the safe harbor requirement - as you indicated, if they defer 6%, then they should receive a larger match.
perhaps the notice language is simply bad, and the document indicated otherwise.
I know of nothing in the regs that would permit the limiting of a safe harbor match to the minimum automatic enrollment % for an individual. In fact, a new participant who defers 6% will receive a different rate of match than a similar individual who defers 6% and has been there for a longer period of time. clearly a violation of the safe harbor rules.
(but then again, maybe I am reading the QACA rules incorrectly - but I thought that a QACA was simply a safe harbor that also inlcuded an automatic enrollment feature which pertains to those employees who have not made an elections)

Edited by Tom Poje, 19 November 2009 - 07:51 AM.

Humbug, back for a month.
(yes, that is really me)

#3 Kevin C

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Posted 19 November 2009 - 10:08 AM

The plan document language determines what the match is. Of course, if they want to be a QACA SH, the plan provisions must comply with the safe harbor regulations.

1.401(k)-3(k)(2) Lower matching requirement. --In applying the requirement of paragraph (c) of this section in the case of a cash or deferred arrangement, the basic matching formula is modified so that each eligible NHCE must receive the sum of --

(i) 100 percent of the employee's elective contributions that do not exceed 1 percent of the employee's safe harbor compensation; and

(ii) 50 percent of the employee's elective contributions that exceed 1 percent of the employee's safe harbor compensation but that do not exceed 6 percent of the employee's safe harbor compensation.

If any eligible NCHE receives less match than this, they are not SH. Deferring 6% of compensation results in a 3.5% of compensation match. Your client's understanding of the match would not comply with the SH rules.

1.401(k)-3(c)(4) says the match for an HCE can't be any higher than the match provided to an NHCE at the same deferral level. That would cause a problem if there were higher match levels for those with longer service.

One other issue. It sounds like the SH notice didn't accurately describe the QACA SH matching contribution. If the plan document is set up to be QACA SH, then you have an operational failure because the notice requirements were not followed. Of course, we have no guidance on how to correct this specific failure. I would start by looking to see how many of the new participants each year elected to defer 3%. That will give you an idea of whether or not the incorrect notice affected the new participants' deferrals levels.